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How do I set up payroll for the first time for my small business?

Setting up payroll for the first time is really just a series of straightforward steps done in the right order. Rush through them or skip one and you’ll create headaches that take months to untangle. Here’s what the process looks like in Arizona.

First, get an EIN from the IRS if you don’t already have one. Apply online at irs.gov and you’ll receive your number immediately. This is the identifier tied to all of your federal tax obligations as an employer, so nothing else moves forward without it.

Next, register with the Arizona Department of Economic Security for unemployment insurance. You’ll get a UI tax account number and an assigned tax rate. New employers in Arizona typically start around 2% on the first $8,000 of each employee’s wages. Don’t put this off. The state will eventually find out you have employees, and retroactive penalties are worse than just registering on time.

Set up an EFTPS account at eftps.gov for making federal tax deposits. This is how you’ll send Social Security, Medicare, and withheld federal income tax to the IRS. Registration takes about a week because they mail you a PIN, so start early. Missing federal tax deposits triggers penalties starting at 2% that escalate quickly to 15%.

Before running your first payroll, collect a federal W-4 and an Arizona A-4 from each employee. Arizona handles state withholding differently than most states. Instead of a detailed worksheet, employees pick a withholding percentage from a set list on the A-4. You’ll also need an I-9 for employment eligibility verification. Keep all of these on file.

Choose a payroll system that handles tax calculations, filings, and deposits automatically. QuickBooks Online Payroll works well for most small businesses, especially if your books are already in QBO. If you want help getting the system configured correctly from the start, payroll system setup and training can save you from costly configuration mistakes that compound over time.

Decide on a pay frequency. Arizona requires that you pay employees at least twice per month. Most small businesses settle on biweekly or semi-monthly. Pick whichever aligns with your cash flow and be consistent with it.

Open a separate bank account just for payroll. This isn’t legally required, but it makes everything cleaner. Transfer the exact amount needed before each pay run so payroll funds never get mixed with operating money. It also makes reconciliation significantly easier.

Then run your first payroll and make your tax deposits on time. Most new employers are monthly depositors, meaning federal taxes are due by the 15th of the following month. Arizona state withholding follows a similar schedule. You’ll also file Form 941 with the IRS quarterly and submit unemployment reports to DES.

The biggest mistake new employers make is falling behind on deposits. The IRS treats payroll taxes as money you’re holding in trust for your employees, and they enforce that aggressively. Use a system that automates deposits so you never have to think about deadlines. Many Phoenix bookkeepers see new business owners get caught by this in their first year, and the penalties are entirely avoidable with the right setup from day one.

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More Questions

How much should an owner-operator set aside for quarterly estimated tax payments?

Set aside 25 to 30 percent of your net income after expenses. That range covers federal income tax, self-employment tax, and Arizona state tax. Transfer the money weekly into a separate savings account so it's ready when quarterly payments come due.

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What are the trust accounting requirements for property managers in Arizona?

Arizona requires property managers to hold tenant deposits and collected rents in a separate trust account, never commingled with operating funds. A monthly 3-way reconciliation of the bank statement, trust ledger, and individual tenant ledgers is required, and violations can result in license revocation.

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How do I track 1031 exchange cost basis and carryover depreciation on the replacement property?

The replacement property's basis equals the relinquished property's adjusted basis plus any additional cash you paid. Depreciation splits into two layers: carryover from the old property on its remaining schedule and a new 27.5-year schedule on any additional basis.

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How does Arizona tax construction contractors differently under TPT?

Arizona taxes prime contractors on 65% of the total contract price under the prime contracting TPT classification. Subcontractors, spec builders, and owner-builders each follow different rules. Getting the classification wrong is one of the most common filing mistakes.

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Does my Phoenix business need both an Arizona TPT license and a city business license?

Yes, you need both. The Arizona TPT license from the Department of Revenue handles tax collection and remittance. The city of Phoenix business license is a separate operating permit. One does not replace the other.

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What is the difference between overbilling and underbilling on a WIP schedule?

Overbilling means you've billed more than the work you've completed, and it shows as a liability. Underbilling means you've done more work than you've billed for, and it shows as an asset. Both are tracked per project on a WIP schedule.

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Phoenix-based bookkeeping firm serving small businesses across the Valley of the Sun. We provide bookkeeping, payroll, tax preparation, and fractional CFO support with transparent pricing and no upselling. Owned and operated by David Morrow, a former COO with 20+ years of business experience.

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